The bigger problem with the EU: no growth!

The situation in Cyprus is gathering plenty of attention despite the fact the problem itself is small.  The fear is more about the ramifications of the potential solution: if an EU country is allowed to levy deposits under the guaranteed threshold, does that mean governments elsewhere can and will do the same thing?  Just the risk of this is perhaps enough to create a bank run.  So while it might be that there is nothing to fear but fear itself, many will be very concerned about the consequences.

To me it seems a pretty remote possibility that the actions taken in Cyprus will create a bank failure somewhere else.  There is, however, a bigger more immediate problem in that while financial markets are much more stable in the region than in mid 2012, there is still nothing to show for it in the real economy. 

The latest round of the flash PMI data for the EU showed the region as a whole deteriorated in March.  While other leading indicators have been a bit better, the PMI data are probably the most reliable and timely.

Given the signs of real activity are still bad its hard to believe that financial markets will be content with the mere threat of bond purchases by the ECB being enough to balance out the current risks.  It seems more likely that markets will force their hand and test to see just how credible that threat is, which will cause a lot of consternation along the way.